Download short-run aggregate supply curve

Macroeconomics in Modules
and
Economics in Modules
Third Edition
Krugman/Wells
MODULE 28 (64)
Aggregate Supply
What You Will Learn
1
How the aggregate supply curve illustrates the
relationship between the aggregate price level
and the quantity of aggregate output supplied
in the economy
2 What factors can shift the aggregate supply
curve
3 Why the aggregate supply curve in the short run
is different from the aggregate supply curve in
the long run
2
The Aggregate Supply Curve
• The aggregate supply curve shows the relationship
between the aggregate price level and the quantity of
aggregate output in the economy.
3
The Short-Run
Aggregate Supply Curve
• The short-run aggregate supply curve is upwardsloping because nominal wages are sticky in the short run:
– a higher aggregate price level leads to higher
profits and increased aggregate output in the short
run.
• The nominal wage is the dollar amount of the wage paid.
• Sticky wages are nominal wages that are slow to fall even
in the face of high unemployment and slow to rise even in
the face of labor shortages.
4
The Short-Run
Aggregate Supply Curve
Aggregate price
level (GDP deflator,
2005 = 100)
Short-run aggregate
supply curve, SRAS
10.6
7.9
0
1929
A movement down
the SRAS curve leads
to deflation and lower
aggregate output.
1933
$716
977
Real GDP (billions of
2005 dollars)
5
Shifts of the Short-Run
Aggregate Supply Curve
(b) Rightward Shift
(a) Leftward Shift
Aggregate
price level
Aggregate
price level
SRAS 2
SRAS 1
Decrease in short-run
aggregate supply
Real GDP
SRAS 1
SRAS 2
Increase in short-run
aggregate supply
Real GDP
6
Shifts of the Short-Run
Aggregate Supply Curve
• Changes in commodity prices, nominal wages,
or productivity lead to changes in producers’
profits and shift the short-run aggregate supply
curve.
7
Factors that Shift Short-Run Aggregate
Supply
Changes in commodity prices
If commodity prices fall
If commodity prices rise
Short-run aggregate supply increases
Short-run aggregate supply decreases
Changes in nominal wages
If nominal wages fall
If nominal wages rise
Short-run aggregate supply increases
Short-run aggregate supply decreases
Changes in productivity
If workers become more productive
If workers become less productive
Short-run aggregate supply increases
Short-run aggregate supply decreases
8
Long-Run Aggregate Supply Curve
• The long-run aggregate supply curve shows the
relationship between the aggregate price level and the
quantity of aggregate output supplied that would exist if
all prices, including nominal wages, were fully flexible.
9
Long-Run Aggregate Supply Curve
Long-run aggregate
supply curve, LRAS
Aggregate price
level (GDP deflator,
2005 = 100)
15.0
…leaves the quantity
of aggregate output
supplied unchanged
in the long run.
A fall in the
aggregate
price level
7.5
0
Potential
output, YP
$800
Real GDP (billions of
2005 dollars)
10
Actual and Potential Output
from 1989 to 2009
11
From the Short Run to the Long Run
(a) Leftward Shift of the Short-Run
Aggregate Supply Curve
Aggregate
price level
(b) Rightward Shift of the Short-Run
Aggregate Supply Curve
Aggregate
price level
LRAS
LRAS
SRAS2
SRAS2
SRAS1
A1
P1
SRAS1
P1
A fall in nominal
wages shifts SRAS
rightward.
A1
A rise in nominal
wages shifts SRAS
leftward.
YP
Y1
Real GDP
Y1
YP
Real GDP
12
Economics in Action
Prices and Output During the Great Depression
13
Summary
1. The aggregate supply curve shows the relationship
between the aggregate price level and the quantity of
aggregate output supplied.
2. The short-run aggregate supply curve is upward
sloping because nominal wages are sticky in the short
run.
3. Changes in commodity prices, nominal wages, and
productivity lead to changes in producers’ profits and
shift the short-run aggregate supply curve.
4. In the long run, all prices are flexible and the economy
produces at its potential output, and the long-run
aggregate supply curve is vertical at potential output.
14